The market gives a big thumbs up as oil services firm Kentz (KENZ) announces plans to buy US rival Valerus Field Solutions for $435 million in cash.
The counter storms ahead 9.2% to 635.5p as Kentz, which was itself a takeover target earlier this year, looks to boost its engineering capability and exposure to the Americas. We last considered the investment case in detail here.
The deal remains subject to shareholder approval but the market reaction suggests investors are on board and its main shareholder Kerbet (13.4% holding) has given an irrevocable undertaking to vote in favour at an extraordinary general meeting scheduled for 2 January.
Chief executive officer (CEO) Christian Brown tells Shares: 'Our strategy has driven the transaction, not the other way around.' He adds that it fits with Kentz's long-term aim of building scale in its engineering (EPC) business. This unit, which together with the technical support services (TSS) and construction arms, accounted for 25% of total revenues in 2012.
Brown notes there are synergies as Valerus operates in the US and Latin America where Kentz 'doesn't do a lot of business' and its roster of clients, bar Chevron (CVX:NYSE), are not names the company currently serves.
The CEO says a 'fair price' of around six times 2014 earnings before interest, tax, depreciation and amortisation (EBITDA) has been paid and the success of the deal is not reliant on 'silly synergies'.
The deal adds about 700 people to Kentz's 14,500 employees. Brown explains Valerus currently has 60% of its budgeted 2014 revenues covered by its order book and when expected book and burn business – work contracted and carried out almost immediately – is added this rises to 90%. In order to finance the deal the company is taking out a new $400 million loan at a rate of 2.25% over LIBOR – with the balance accounted for by its $219 million cash pile and a $160 million revolving facility.
Liberum analyst Andrew Whittock says he expects to retain his 'buy' rating and comments: 'Our initial reaction is that the acquisition looks consistent with Kentz strategy (if somewhat larger than expected) and should enhance growth prospects, particularly in the Americas.'
Arden retains its own 'buy' advice and ups its price target from 600p to 650p. The stockbroker says: 'It is great to see the expected EPC acquisition from Kentz giving the company access to higher-value work and new clients plus greater exposure to new geographies.
'This is a large acquisition for Kentz that will significantly increase the size of the company and integrating it will doubtless be a challenge (though we do understand no synergies have been assumed by Kentz here). Nevertheless there is clearly much to be gained for Kentz and risk is partly mitigated by the level to which Valerus has already covered expected 2014 revenues.'